Working on Your Credit as a Young Person

I applied for my first credit card the summer after my 18th birthday, with the intent of building my credit. I went overboard within that first year, and nearly maxed it out several times, but from these experiences I've learned the do's and don'ts of credit, especially for young people. Over the last year and a half, I've raised my credit score 100+ points and was approved for a house based solely on credit card payment history. These concepts and tips helped me immensely when I was trying to fix my credit.

This is the basic credit tier breakdown, operating within the 300-850 range used by FICO:
Excellent Credit: 750+
Good Credit: 700-749
Fair Credit: 650-699
Poor Credit: 600-649
Bad Credit: below 600

1. Don't think of your credit card as extra money in your pocket. It isn't. Plain and simple. It is money that you will HAVE to pay back. In my opinion and experience, the best way to utilize your credit card is to purchase items you planned on purchasing anyway, like gas or groceries. Set that money aside when you get paid to ensure that you'll be able to pay off your credit card at the end of the billing cycle, so you won't accrue any interest.

2. Manage your credit utilization. In order to keep your credit from being negatively affected, your credit utilization should be below 30%. Your utilization is based on how much you are spending in reference to how much your limit is. For example, if you have a $1,000 limit and you use $300, your  credit card utilization is 30%. In my experience with Discover and Capital One, you can request credit line increases after making on-time credit card payments for 3 months. Your credit card may also automatically have the limit increased after several months of on-time payments. Requesting a credit limit increase can positively affect your utilization. Referencing my earlier example, if your $1,000 credit limit is upped to $2,000 and you still use $300, your utilization is bumped from 30% down to 15%. Utilization over 30% negatively affects your credit, but the lower your utilization is, the more positively your credit will be affected.

3. Keep tabs on your debt. Ignoring your credit card debt won't make it go away. It's very easy to feel overwhelmed or ashamed by it, but ignoring it will make the problem worse. Having an understanding of where your debt stands is essential to getting out of debt, and enables you to make a plan to pay it off.  If you can pay off bigger chunks at a time, that will lower the amount of debt that's accruing interest. Your debt accounts for 30% of your credit score, so keeping up with your debt will ultimately have a positive impact on your credit score.

4. Understand your student loans and payment requirements for them. If you're going to college or have gone to college, chances are you have had to take out at least one student loan. The first step to understanding student loans is determining whether you have subsidized loans or unsubsidized loans, and how that impacts your payments. Subsidized loans are the better option if you absolutely have to take out loans. The interest on your subsidized loan is paid by the Department of Education while you are in school at least half-time, in a grace period, or in deferment. This means that if you take out $20,000 in subsidized loans during your schooling, your loan amount will still be $20,000 when you graduate or leave school. However, unsubsidized loans begin accruing interest when the student takes out the loan. If a student takes out a $20,000 unsubsidized loan their freshman year at 4% interest, that loan will accrue an additional $800 each year, leaving the student with a balance of $23,200 at the end of four years, assuming they didn't have to take out any additional loans.

You will need to set up a payment schedule before you graduate. Several different schedules are offered, based on your income and loan amounts. Paying off your loans in small, graduated payments may seem good at the time, but you will ultimately pay way more interest. The best way to pay your loans is to pay as much as you can handle for as long as you can, then bump your payments down as needed. If you pay them off in larger amounts, there will be a lesser amount remaining to accrue interest. A majorly useful tip is to consolidate your loans if you have varying interest. My boyfriend had 3 loans with interest between 3.75% and 4.50%. When we consolidated his loans, his interest rate for all three loans went down to an even 4%. His loan with 3.75% interest went up .25%, but his two loans with 4.50% went down .50%, which saves a bit of money on interest in the long run. It is free to consolidate your loans, and you'll only have to make one payment a month rather than several.
(My advice on loans: Unsubsidized loans should be your last option. Many schools offer departmental and academic scholarships that are available to all class levels; another good option is taking prerequisite classes at a community college. Prerequisite classes will usually take up your first two years of college, meaning you can avoid thousands of dollars in debt by taking those classes at a community college, and you can potentially come out of it with an Associate's degree as well.) 

5. Minimize credit card applications, especially for in-store credit cards. It's incredibly tempting to get that extra 10-20% off your purchase, but hard inquiries on your credit can negatively affect your credit. A hard inquiry can bring your credit score down 3-5 points, but if you're on the brink of poor credit, or if you apply to multiple cards, you take your score down a tier.

6. Look over your credit card statement every month. Many credit card companies, such as Discover, will categorize your charges for you. If you're like me, you may find that you spend a lot of money on eating out. If you're eating out twice a day at $10 on average, you're spending $620 a month on food that probably isn't good for you, and is definitely marked up because it's convenient. I personally spend less than $150 a month on groceries for myself, which means that that $620 monthly figure is more than 4 times what it costs me to eat at home.
Another thing to look out for on your statement is charges from subscriptions you may not use or need anymore. If you don't use your Amazon Prime account enough to justify the yearly price, then get rid of it. If you're paying for a gym you never go to, cancel your membership. You have to evaluate the practicality of the charges you're applying to your credit card.

7. Take advantage of cash back/airline mile credit cards. If you have credit that is considered the high end of "fair" or better, you may be able to get a card that offers cash back or airline miles for your purchases. I have a Capital One card that offers 1% cash back on all of my purchases as well as higher cash back for purchases from certain stores or brands. I bill my utilities to this card, then bill the card to my bank card. All of my bills are paid in full, on time, and I collect the cash back to use however I please. My card offers the cash back in the form of gift cards, statement credits, or purchase redemptions. These cards are great for purchases you will need to make, whether you use your credit card or not.


As always, please leave any comments or criticisms you may have for these points. Keep in mind that this is what helped me manage my credit and get on track to financial stability.

♥,
Emily